Abercrombie & Fitch (ANF) surges on same-store sales news

Abercrombie & Fitch ANF surprised the Street by a hefty margin when it reported same-store sales Thursday morning. The trendy apparel retailer said sales at stores open one year or longer grew by 9% in June. Analysts were expecting an increase of 2.8%.

This was the retailer’s best same-store sales increase in more than two years and was actually just one of four recorded sales gains since July 2008. The tide may be turning for ANF, which as recently as September was posting same-store losses in the neighborhood of 30%.

An improving sales landscape hasn’t yet trickled down to share performance, however; the stock is down more than 30% from its 52-week peak hit in mid-April. What’s more, the shares are far from retracing even half of the 84% ANF surrendered between October 2007 and November 2008. Still, Thursday’s news was encouraging to some investors, who sent the stock nearly 8% higher on the day. Options traders were active as well, moving roughly 60,000 contracts across the tape (compared to average daily volume of roughly 7,500). It looks as though an investor may have been playing risk reversals on the August 32 puts and the August 38 calls (buying the calls and selling the puts to create a synthetic long stock position). Earnings are expected from the retailer on or around August 12, which is before August-dated options expire.

For those who think ANF shares are ready to catch up to its improving sales data, we’ve outlined a bullishly oriented option strategy below. We’ve also detailed a bearish strategy for ANF skeptics. These are hypothetical examples, not buy/sell/hold recommendations. Always consider your own risk/reward parameters before placing any new trades. Prices are given as of Thursday’s close, when ANF was trading at $34.45, up $2.55 (7.75%) on the day.

To learn more about option trading strategies or our online option platform, visit our events page and check out schedule of free weekly webinars. Upcoming classes include an in-depth look at covered calls in the Two Traders, One Strategy series.

Bullish Option Strategy: Long Broken Wing Call Butterfly

A call butterfly can be purchased for a net debit of $5.70 by buying one August 27 call, selling two August 37 calls, and buying one August 41 call. The maximum potential profit is $4.30 and occurs if ANF is trading right at the 37 strike when these options expire in six weeks. Losses are capped at the premium paid ($5.70) and occur if ANF is trading below $27 when the options expire.

Because this is a “broken wing” strategy (the difference between strike prices is not even on both sides of the trade), there is only one breakeven price – $32.70 (the lower-strike long call plus the premium). Finally, anywhere above 41, the gains will be capped at 30 cents, which is the maximum potential profit minus the difference between the short strike and the higher-strike long call.

Profit/Loss of Abercrombie & Fitch (ANF) long call butterfly

Bearish Option Strategy: Bear Put Spread

Investors who feel ANF has little upside potential and in fact will continue its downside trend, could buy the January 34/27 put spread for a net debit of $2.90 (buying the slightly downside 34 put and selling the out-of-the-money 27 put). If ANF is still trading above $34 when these options expire, the investor can potentially lose as much as 100% of the debit paid, or $2.90. If ANF falls below the 27 strike, however, the maximum gain is $4.10. Breakeven for this spread is $31.10; if the stock is trading anywhere below this at expiration, the spread should be profitable.

Profit/Loss of Abercrombie & Fitch (ANF) bear put spread